Are 3M, GE and Tyco Cheap Stocks?

3M Co. (NYSE:MMM) is a conglomerate that specializes in Industrial and Transportation, Healthcare, Display and Graphics, Consumer and Office, Electro and Communications and Safety, Security and Protection industries. Over the past 10 years, 3M invested approximately 6% of its total sales into research and development, which is the key to the company’s growth potential. The international expansion strategy will also support 3M’s long-term growth. Jean-Marie Eveillard’s First Eagle Investment Management reported 6.35 million shares in MMM in the second quarter. Boykin Curry’s Eagle Capital Management boosted its position by 25% to 4.32 million shares before July.

Low consumer confidence from the second quarter has already affected 3M’s third quarter results. 3M. Co. reported its third-quarter results on October 25th. Its total revenue increased by 9.6% to $7.5 billion. Its EPS is $1.52, down by 1% from $1.60 in the second quarter. Third quarter operating income drops 4.5% to $1.58 billion. George W. Buckley, 3M chairman, president and CEO said:

The business environment remains challenging, as the economic softening that we experienced late in the second quarter continued into the third, while growth rates were good across much of our portfolio.

MMM has a Trailing PE of 13.78, and is expected to deliver $5.94 in 2011 and $6.40 in the next year. The stock is closed at $81 on October 28th. We are going to take a closer look at 3M and its competitors including Carlisle Companies (NYSE:CSL), TYCO International (NYSE:TYC) and GE (NYSE:GE) to determine which stocks promise opportunities for investors.

Valuation:

Using Zacks’ earnings growth estimates, we calculate the projected P/E ratio in 2014 for MMM, CSL, TYC, and GE.

Ticker

Growth rate

PE(2014)

Beta

MMM

12.00%

9.94

1.02

CSL

13.00%

10.00

1.35

TYC

13.00%

10.06

0.87

GE

12.60%

8.88

1.21

As shown in the graph, the four stocks do not have much difference in their growth rates and multiples. MMM gets a medium P/E ratio among its competitors, indicating the stock is priced on an average basis. GE was undervalued and has been trading at a discount for a long time. GE’s exposure to the financial sector through GE Capital is the main reason behind its low PE ratios.

Volatility:

Beta can be used as a rough measure of risk. Per Yahoo! Finance, MMM’s beta is 0.91; CSL’s beta is 1.12; TYC’s beta is 1.16; GE’s beta is 1.88. MMM has a below-market risk here, while GE has the highest beta. GE’s risk level is consistent with its past price path. GE tends to perform in-line with the S&P500 when the market is up, while decrease more when the market is down. Investors may be overestimating GE’s risk due to the business model used by GE Capital.

Hedge Fund Ownership:

Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on the average. In the second quarter, TYC was the most popular stock here, and it was owned by forty eight hedge funds. Phill Gross and Robert Atchinson’s Adage Capital Management took the largest stake among those hedge funds and had 7.26 million shares. GE was held by 46 hedge fund portfolios, slightly less than TYC. MMM was in 29 hedge funds’ portfolio, and CSL was held by 15 hedge funds.

Insider Purchases

Stocks purchased by insiders tend to outperform the market on the average. In the past 6 months, two insiders purchased CSL, and one bought GE. No insider purchases happened in MMM and TYC.

Overall, based on our analysis, 3M Co. is fairly priced compared to its peers. Its lowest risk level brought a fair hedge fund interest, while no insiders purchased the stock in the past 6 months. TYC seems a little bit more attractive than other companies discussed in this article. All these four stocks are cheap, especially compared to low growth utility stocks such as American Electric Power (NYSE:AEP), Dominion Resources (NYSE:D), and Duke Energy (NYSE:DUK). We prefer conglomerates over utilities over the long-term. However, conglomerates are cyclical businesses, and we’d rather own technology stocks like Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) that are 30% cheaper based on their expected 2014 PE ratios.

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